Dividends are a relatively safe way for investors to get reliable returns, but dividend stocks often struggle to keep pace with the returns of the overall market. Fortunately for dividend investors, a decent dividend yield doesn’t necessarily mean investors should give up on share price gains as well. Bank of America’s yield advantage model screens for dividend stocks that are also undervalued based on factors such as free cash flow, enterprise value and return on capital. Here are eight dividend stocks positioned to outperform their peers.
H&R Block (ticker: HRB)
H&R Block has the highest yield advantage score of any stock. H&R Block’s cash flow-to-enterprise value ratio (13 percent) and its return on capital (37.8 percent) are among the top percentile of stocks screened. HRB stock has lagged the market in 2018, but that simply means that dividend investors get a higher yield if they buy the dip. The stock’s forward earnings multiple of 12.3 suggests downside is limited. H&R Block raised its dividend payout by 4.2 percent in June, and its current yield is 3.9 percent.
HP is tied with H&R Block in overall yield advantage score, but its 161.6 percent return of capital is tops among all stocks screened. HP also has an impressive 11 percent free cash flow-to-enterprise value ratio, and its recently approved $4 billion buyback plan should help support the stock in the near term. HP’s legacy printer and PC markets may be in decline, but HP has been gaining share from competitors who have succumbed to the difficult environment. HP has a 2.1 percent dividend yield. Bank of America has a “buy” rating and $28 price target for HPQ stock.
Now that all the Broadcom merger drama has died down, the company is recommitting to capital returns. Broadcom’s FCF/EV of 14 percent is higher than any other stock screened, and its return of capital is also a respectable 25.7 percent. Broadcom has a 2.8 percent dividend yield, but the company has pledged to pay out 50 percent of its free cash flow in dividends. That rate suggests Broadcom’s dividend could jump to as high as 3.8 percent in November. Bank of America has a “buy” rating and $300 price target for AVGO stock.
Altria Group (MO)
Tobacco giant Altria Group will…
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